is the chair of the department of business at CityTech, City University of New York, and research fellow in the department of financial engineering, The Polytechnic Institute of New York University in Brooklyn, NY. zissu@sprynet.com

Abstract

Investors in securitized senior life settlements are exposed to longevity risk. The value of their security will decrease if life settlers live above life expectancy because premia will have to be paid for a longer period and the death benefits are not received at life expectancy but at a later date. The authors examine a block of life settlements and show how it is possible to create an IO (interest only) security, and a PO (principal only) security by stripping apart the premia from death benefits for the pool of life settlements backing a life settlement securitization. They show how it is possible to hedge the value of this IO security.